Welcome back to my series chronicling the purchase of my latest rental property, a small duplex in the Midwest. The goal of this series is to demystify the out-of-state investment process by sharing the ups and downs of a deal with you, from start to finish. In the last edition, I explained my thought process in selecting the market I’m buying in right now.
Today, I’ll discuss each member of my team, how I found them, what made the difference in deciding to work with them, and any immediate costs I paid for this particular deal (before or at closing) to get the property closed. You may recall that the property is a duplex (3/1 and 1500 square feet per unit) with expected rents of about $650-750 per unit.
When we left off, I had zeroed in on a city, but I had no connections, no team, and no knowledge of any of the neighborhoods. I had to get a local pro working for me right away.
My Agent
The first team member I added was my agent. I met him through the Bigger Pockets forums. He was a very active participant from the market I had selected, and was fairly responsive when I interviewed him. One of the frustrations of investing out-of-state for me has been that nobody I work with in real estate ever seems to have the same level of professional urgency that I am used to. In some markets, I experienced times when it took two days or more to get a return phone call. My agent returned calls on the same day, which still sometimes felt slow, but it was a lot better than some agents I had dealt with.
My agent also had a very firm understanding of my requirements, and brought me a number of properties that were at least worthy of further investigation. He was willing to tell me when I should discard a property, and that was an absolute necessity.
My agent had set me up with access to the local MLS feed, and would highlight deals that seemed worthwhile to him while steering me away from others. Eventually, we found a property (I’ll discuss this next week) and needed a pre-qualification letter to make an offer.
Cost: $295 brokerage fee at closing
My Lender
In order to get the pre-qualification letter, I had to get in select a lender (or at least work with one long enough to get the letter– you can change lenders before close).
My lender was a referral from a fellow real estate investor and friend. I shopped my mortgage application around and found a variety of costs and rates. My lender came in somewhere around the middle of the pack in terms of cost, but my friend swore to me that their customer service was excellent. True to his word, they were great. I received email responses in minutes, the property closed on time, and the loan costs were below the estimate. I can’t overemphasize how valuable a responsive lender is.
On other deals, I have experienced some seriously poor customer service from lenders. It’s not hard to see why– most loan officers don’t have any particular training or skills, they just process paperwork. What’s worse, lenders profits are directly related to how many applications they process, so most loan officers are overburdened to the point that customer service falls completely by the wayside. A lender may be very available before when trying to convince you to work with them, and they become virtually impossible to contact. That’s a great reason to keep a responsive and affordable lender when you happen upon one. There are so many lenders out there that you should absolutely never give a poor lender a second chance. Take your business elsewhere.
I provided my tax, pay, and asset information to my lender, who was able to return a pre-qualification letter within about 48 hours. I made an offer (a topic for another day), received an acceptance, and then needed to find a home inspector during the contingency period.
Cost: $1574 in loan origination charges and points, paid at closing
My Home Inspector
I love my home inspector, and I’m not ashamed to say so. The inspector is the only person on your team who makes money whether or not you close on the property, so they are the person most likely to give you an unvarnished, unbiased opinion of the property.
I actually found my inspector through a Google search immediately after getting an accepted offer on the property. He was a sole proprietor, and I had left a message on his cell phone while calling around. I was just in the middle of providing my payment information to a big property inspection company when he called me back and offered me a free pest inspection to earn my business. I liked how hungry he was, and he was a genuinely nice guy. I canceled on the large inspection company. It turned out to be a very, very good choice. My inspector spends about two hours with me on the phone every time he delivers an inspection report. He’s a landlord and a contractor, so I get a local expert’s view on each property along with my report. It’s an incredible value added service.
Some inspectors just deliver the report, while others are are willing to discuss the property subjectively with you. I strongly recommend interviewing your inspector and finding one willing to spend some time on the phone or over email discussing issues of particular note, and helping you to assign levels of severity to the issues that are found. When the report comes back with a hundred issues, it’s reassuring to be able to immediately mark eighty of them as trivial.
Cost: $349 for property and pest inspections
My Property Manager
I had been investing in the market for about a year, and had two units that were operating smoothly, but there were various aspects I thought should be going better. In particular, water and sewer bills were running far, far over the estimated budget, and were eating into my profits. I decided to move to tenant-paid water (after dropping rents), but my existing property manager was very resistant to that plan. Ultimately, after speaking to a lot of other investors in the area and interviewing other property managers, I decided to fire my property manager and find a new one for this property.
My existing property manager was also the company that employed my agent, so I had a bit of a delicate situation on my hands. I interviewed four other property management firms in the area, and found one that had an online portal that my existing PM lacked, had fewer units managed by each manager, and was accustomed to billing tenants for utilities. It was a much better arrangement for me. I refrained from informing my agent that I would be switching property managers until the property closed. It wasn’t necessary to let them know early anyway, and it allowed us to focus on the task at hand without any hurt feelings.
I already knew what the new property manager’s fees were going into the deal, and I had prepared an evaluation template with all of their fees and charges.
Cost: Tenant placement fees, 10% of gross rents collected
My Insurance Agent
While hunting for property, I was also actively interviewing insurers. I learned after my first deal that it’s best to have insurance quotes before making an offer, not after. Some properties are inexplicably more expensive to insure than others, so I always gather this information while I wait for my real estate agent to physically inspect the property.
My insurance agent was another referral from a local investor. I got three insurance quotes for this property, and this insurer’s quote was the lowest. Even better, the agency is a major national insurer and has the top AM Best ranking.
To be honest, there’s not too much to choosing an insurer. I try to choose an insurer with high customer satisfaction and AM Best rankings (which tend to correlate to promptly paying claims), willingness to be flexible with coverage levels and deductibles, and obviously, premium price.
I always get at least $1 Million in liability coverage on each property, and try to get a moderately high deductible. This insurance policy included the $1,000,000 in liability (per occurrence), a 3% deductible (about $5,000), and lost rent coverage.
Cost: $680 per year, first year paid at closing
My Contractor
I usually try to have my contractor walk the property with the agent at least once. Because a good contractor is hard to find, and because their time is limited, I usually wait until I am just about ready to make an offer on the property to involve my contractor. At that point my agent and PM will have given me a decent idea of what will be needed to get the property rent ready, and I present that information to my contractor. When the inspection comes back, I also send it to my contractor and ask him or her to update their bid to resolve any previously unknown issues.
I followed my same process with my contractor this time. Previously, I had used my property management’s in-house contractors, but I have since become suspicious of such arrangements, especially given the roadblocks they threw up trying to make it inconvenient or expensive to seek other quotes. This time I got a referral from my new property management and a quote from my existing property management for the same scope of work. The independent contractor came under the in-house contractor by about $500, and included the installation of the two water sub-meters to sweeten the deal. I did my best not to be annoyed that I had nearly paid so much more.
This work is still forthcoming (it should actually begin next week) but I’m optimistic as the contractor is going to provide before/after photos on all work, and do a full walk-through/punch list with my property manager when the work is complete.
Expected Cost: $4,500 for light to moderate rehab and adding a shower
What’s Next
Introducing each member of the team to you meant that I had to tell you a few parts of the story out of order. Basically, when you are doing your first deal in a market, you may build your team as the need for each member arises. Referrals and local expertise are hugely valuable, but always seek multiple quotes from independent sources. It takes more time, but it will ultimately help to keep you from making some of my early mistakes.
Next week, I’ll introduce you to my property, and explain what made it a great deal in my eyes. We’ll evaluate it by the numbers, as well as consider some of the difficult-to-quantify elements that make it a great rental.
I’m actually in the same spot you are. I just signed paperwork to lock in my offer with a seller on a duplex. This is my first foray into the world, so having your story to compare to is awesome. My brokerage fees are going to be about $135 though. I’d say you should look at my area, but I don’t want to competition :p (also located in the Midwest, will pay $216k for a property that gets $2300/mo)
Hey there Gwen, thanks a lot for the comment! This property is actually already closed, the story is being told in retrospect over seven weeks. The brokerage fees don’t concern me too much, since they’re such a tiny portion of the overall closing costs. I like the market a lot since the cash flow is very good. I bought this property for $77.5K, got $300 back at closing, and it’s currently renting for $1,350. I’m moving one of the tenants out and doing a little more rehab, so that number will end up closer to $1,500 when all is said and done.
Your cash flow rocks! Awesome job!
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Hey! I am currently reading all of your posts and I have found them so helpful! I live in the Ohio. I am currently trying to find a contractor and property manager to interview. I would love any suggestions you have. I am pursing a owner occupied duplex around the Cleveland area.
Hi Gabby, I have some experience with Howard Hanna in Cleveland, and they do a decent job. I have used a variety of contractors, but for the basic stuff I’ve used OSC Company and they’ve been reasonably priced and done good work. If you need further detail, feel free to use the contact form to reach out to me!
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